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Can Amazon Reinvent the Traditional Grocery Store? [Podcast] | Knowledge @ Wharton

The Journal said Amazon’s supermarket concept strongly resembles ideas from a 2013 report by former Deloitte consultant Brittain Ladd, who now works for AmazonFresh. That report sees Amazon’s supermarkets combining its discounting strategy with online capabilities, adding drive-through grocery pick-up and placing Amazon Lockers inside. The goal is to create “an ecosystem of channels centered on food and groceries capable of meeting the needs of all customers through all available channels,” he wrote.

As for concerns that Amazon is entering a low-margin business, Cohen said it doesn’t have to be problematic. “They view that as an opportunity in many cases,” he said. “At the end of the day, I think this is [about] creating more and more of an efficient connection to customers, especially those who they’re not doing business with, who would like to do business with them.”

Dynamic Pricing

Kahn said one of Amazon’s dilemmas in selling groceries is how to manage the costly effort of delivering to each home and business, the so-called ‘last mile.’ Amazon has to deliver because until it purchased Whole Foods, it didn’t have a lot of stores where people can shop, unlike traditional supermarkets. Walmart got into the grocery business and handled the industry’s thin margins by focusing on “operational excellence” to lower its costs. “They are a low-cost supply chain master,” she said.

“Amazon is proof-positive of the value of big data.” –Mark Cohen

Amazon’s priority is customer convenience. But deliveries can be quite costly because they’re inefficient, Kahn said. Therefore, opening more physical grocery stores could work so there will be more places for customers to pick up their orders. “They need it because their model is so different from a typical operationally-excellent grocery business,” Kahn added.

Moreover, Amazon will find it tough to convince competing bricks-and-mortar retailers to let it open one of its Lockers in their stores. Amazon has been “aggressive in trying to place those lockers throughout the realm. Many stores just don’t have room for them and some don’t really want Amazon delivering through a locker [the same products] they’re trying to sell,” Cohen said. “Amazon is not likely to convince Target to install Amazon Lockers, unless some incredible combination occurs.”

By opening its own stores, Amazon also gets control over pricing and margins. Kahn pointed out that it already uses “dynamic” pricing. At Amazon 4-star stores, prices are in digital form and match the ones on its website. However, the prices “can change as things happen,” she said.

Similarly, at Amazon Books, no prices are displayed. Instead, customers have to open up the Amazon app to find how much the books cost. This way, Amazon could play with the pricing too, perhaps setting different prices for Prime and non-Prime members. “In both of those ways — with ‘price’ and ‘place’ — Amazon is redefining the model,” Kahn said.

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Can Amazon Reinvent the Traditional Grocery Store?.